The annual World Economic Forum jamboree for politicians, businesspeople and other worthies ends today. The talking, networking and skiing will be over for another year. Next year there will be another jamboree – and yet more talking, networking and skiing. Perhaps I’m just jaundiced but these meetings strike me as mere displacement activities. Surely the world’s leaders would better spend their time dealing with urgent and troublesome economic problems back home. OK so they only last a few days, but a few days too many. And, boy, are there problems back home.
It will however be business as usual tomorrow in Brussels, when the next European Union Summit is convened to take stock of developments since the Summit of 8-9 December. And there have been significant developments, though little progress towards resolving the Eurozone’s underlying problems. The Standard and Poor’s downgrades to France and eight other Eurozone members came and went, reminding us of the fiscal fragility of many members of the currency bloc. (Fitch’s followed by downgrading five countries last Friday night.)
The markets took the event in their stride, partly because they expected the downgrades and partly because they had been lifted by the ECB’s huge liquidity boost to Europe’s banking sector. ECB President Mario Draghi has been hailed as the hero of the hour, pumping nearly €500bn of 3-year funding into the banks. His action probably prevented another almighty credit crunch. As the markets’ mood has improved there has even been loose talk that the Eurozone’s travails are being “resolved”. But talks surrounding Greece’s second bailout, initially proposed last July, drag on. The German Government, patience wearing thin, has proposed that Greece should cede its authority over fiscal decisions to a Eurozone “budget commissioner”.
Meanwhile the EU’s wordsmiths have been refining the drafting of the fiscal compact treaty, a souped-up re-tread of the Stability and Growth Pact. In conciliatory mode, it is now fairly clear that the Prime Minister will agree that the ECJ can be used to enforce the treaty’s provisions after all. And, as reported last week, the latest draft contains a statement which commits Britain to the treaty within five years, whether we like it or not. In the words of the treaty:
"within five years at most following the entry into force of this Treaty, on the basis of an assessment of the experience with its implementation, the necessary steps shall be taken, in compliance with the provisions of the Treaty on the European Union and the Treaty on the Functioning of the European Union, with the aim of incorporating the substance of this Treaty into the legal framework of the European Union.”
Even though the markets had a cheery January, the same cannot be said about Europe’s economies. It is now fairly clear that the Eurozone is re-entering recession, as I discussed last week. One particular statistic announced last week was Spanish unemployment in the final quarter of 2011. It has now passed 5 million, nearly 23%. Youth unemployment is over 50%. These statistics illustrate the dreadful failure of EU leaders to address the Eurozone’s economic problems.
The economic news was disappointing here too, though partly overshadowed by more wealth-creating-bashing rhetoric from certain members of the Coalition government. The Deputy Prime Minister’s “simple choice” between supporting a tax system that rewards the “hard-working many” from favouring the “wealthy few” plumbed the depths of wrong-headedness and fatuity. Just who are the “wealthy few”? Are they mainly the people who, in my experience, work and/or have worked extremely hard for what they have? I suspect they are. And the people condemning Stephen Hester’s bonus should be reminded that he was appointed Group Chief Executive at the Royal Bank of Scotland in November 2008 by the then Labour Government on a mutually agreed contract. Contracts, albeit arguably ill-defined ones, should be respected.
Britain’s economy, just in case Mr Clegg hadn’t noticed, is in a mess. Last week’s fourth quarter GDP data were disappointing. But I would caution about the robustness of the ONS’s estimate of the 0.2% quarterly GDP fall, referred to by the BBC as a “sharp drop”. It is worth noting that the figure is likely to be revised several times over before it comes to rest. GDP growth in 2010 was initially estimated to be 1.4% (January 2011), by the March 2011 Budget it had been downgraded to 1.3%, by last year’s November Autumn Statement it had been increased to 1.8% and it is now estimated to be 2.1%. There is quite a difference between 1.3% and 2.1%! Speaking as an ex-Government statistician of some 15 years’ experience, first estimates shouldn’t be taken too literally. Charting the economy can be as much art as science.
Having said all that, the economy will struggle to grow this year. A double dip recession cannot be ruled out. And as if to add to our woes, public sector net debt hit the symbolic £1trillion mark at the end of December, some 64% of GDP. This is the true legacy of “Profligacy Brown”, wrecker of the public finances.
Growth has almost certainly stalled and the Government should be doing everything it can to help business survive and thrive. Many people have called for radical growth policies, many on this site, but rhetoric aside too little has been achieved. Our current plight should be treated as a national emergency. Now is the time for bold supply side measures. Nothing less will do.